This venture capital can send you to heaven, so the company has achieved the power to make you withstand purgatory.
By The Founder magazine (ww.iheima.com)
When I first received a call from the CEO of Gingko telling me his venture capital (VC) firm wanted to invest in my business, I was moved to the extreme. Had I reached the point where I was catching the eye of the CEO of Gingko?
"Don't negotiate with them anymore," he said. "I'll invest in you. The price isn't an issue." Several investment firms had already decided to invest in me as a consortium. They weren't amateurs, but they didn't have Gingko's reputation.
To be safe, I went to a more experienced entrepreneur for advice. He had misgivings. "You'll probably be jerked around. It would be best get a 5 million yuan deposit from them. If they don't invest, you don't give it back to them."
He had done it this way, and the investment ultimately was never completed. Gingko sued to get the deposit back in full. He warned to me gravely and earnestly, but my blood was already seething with excitement. What is 5 million yuan to a company like Gingko? The other investment firms were delighted rather than displeased. Gingko's forceful move had proven their vision. They all said, "Just let me invest with Gingko. I'll pay whatever price Gingko pays."
The term sheet (investment letter of intent) was signed, and due diligence was nearly complete. All was professional and meticulous. But soon, I would I would get a taste of another side of Gingko.
"I'm overseas." "You can speak to so and so." Simply put, I could no longer reach the CEO. But we had already agreed on the term sheet, and my flexibility was limited. I could only wait.
A month and a half later, Gingko finally asked me to come to their Beijing office again. "The project is good," the project leader said. "But another team of ours decided to invest in a company with basically the same business as yours. Generally, we don't invest in two competitors at the same time. Would you be okay with us investing in both of you? Even if you say yes, we won't necessarily invest in yours."
Such a callous question is extremely humiliating for an entrepreneur. I stood up, walked out, and walked circles in the corridor. The lawyer I had brought was unprepared to discuss the issue. The term sheet does not possess the force of law. He was helpless.
I walked back into the office. "I accept," I said. Typically, when a start-up reaches the financing stage, it means that there is an urgent need for capital to accompany rapid growth.
The Gingko team didn't expect me to compromise, but they apparently had a plan available when I did. "If the competitor we invest in has an activity, can you go to the site to support them?"
This went too far. But getting the money was more important than anything else. "Sure," I said.
"Compared with your competitor, your price is too high. Can you discount it by 30 percent?"
I had the feeling that the financing would be impossible even if I agreed to 30 percent. But I couldn't set prices my self. I had to discuss with the shareholders from the first-round financing. The Gingko team allowed me to go back and discuss with my investors.
A week later, I received a phone call. "I'm sorry, we can't invest. We invested in your competitor."
When I went to the several investment firms with whom I had initially been negotiating, they were unwilling to revisit the investment.
Gingko certainly had its considerations in not investing in me. But I fell into a predicament as a result. I named this the "Gingko Predicament."
There is a saying in China's venture capital circles. Did Gingko invest in you? Did Gingko not invest in you? The former means you'll have a meteoric rise. Investment firms big and small will rush to you. The latter signifies a disastrous decline. If Gingko doesn't invest in you, it's certainly because you have problems. Even if someone is still willing to negotiate with you, you'll have lost bargaining power.
After speaking with some other entrepreneurs who had also had talks with Gingko, I found that mine was not an isolated case. Our experiences were more or less the same.
One entrepreneur lamented that the United States has a sound credit system. If there is no major problem with the entrepreneurial team, investors will generally not violate the agreed-upon term sheet. But the situation in China is different. The entrepreneurial team and the investor are on unequal footing.
"From the term sheet to the actual investment," the entrepreneur said, "if the valuation difference is around 20 percent, I can understand that. But if the difference is 60 or 70 percent or even more, it's just not a sincere approach." He encountered the latter.
Another entrepreneur described Gingko's investment style in China in three ways. First, they are assiduous and hardworking. The CEO and other investors can be seen at any occasion where there is a demand for investment. Second, they are ferocious in their pursuit of investment projects, high prices excluded. Third, they then delay and pressure for lower prices, with the result that compared to the wide net of their term sheets, they complete very few investments.
There are some other things involving the excessive packaging of invested companies by investors and even the possible transfer of benefits. And these things are not necessarily conducive to the development of the company.
One entrepreneur said, "Only in the late stage did we discover that what the investor wanted was for us to scale up quickly and list, while what we wanted was to work hard and do a good job. Maybe some industries or companies need this kind of approach for capital, but it didn't fit for us."
One Chinese company in which Gingko invested listed on the Nasdaq for more than $10. Before long, their share price had dropped to less than a dollar.
The CEO's business acumen is undeniable. In less than six months, he has sent multiple companies in which Gingko has invested to list in the U.S. Some say this has nothing to do with the CEO, that this is mainly the role of an investment bank. I don't think this can be separated from the CEO's judgment.
In China, the CEO's extraordinary ability has to a large extent created the Gingko of today. Gingko can send you to heaven, so the company has achieved the power to make you withstand purgatory.
(This article has been compiled by Jianqiang Liu, the staff writer of The Founder magazine, based on the true experiences of four entrpreneurs. Gingko is a pseudonym for a VC firm.)